FUND MANAGER IS GETTING

John B. Neff, the man behind Vanguard's giant Windsor fund, has been vindicated this year after a highly publicized slump.

"He has had a good turnaround, not only on an absolute basis but when compared with his peers," said Ken Gregory, editor of the No-Load Fund Analyst, an industry newsletter based in San Francisco.

Neff's approach, buying stocks that are underpriced, has never changed. But that style, called value investing, fell out of favor for several years, and even when the fund advanced in 1991, it lagged behind competitors.

Some analysts began to wonder whether Neff and some like-minded managers, including Michael Price of the Mutual Series Fund, had lost their touch.

"You don't like to stink, obviously, and we did quite badly in '89 and '90," Neff said in an interview at his Vanguard office in Valley Forge, Pa.

But as Neff's 30-year record at Windsor suggested, the tide would turn - eventually. Among stock funds seeking growth and income, Windsor posted the best performance for the second quarter, with a 3.8 percent total return. Among all mutual funds with more than $5 billion in assets, the $11 billion Windsor fund is on top for the quarter and for the year.

Of the down years, Neff complains not of an overdemanding or fickle public, but of a stock market that was irrational.

It assumed the worst about the battered bank and savings and loan group in which he had sunk 30 percent of assets.

The ensuing rally in that sector mocked the theory, beloved in academe and ridiculed on Wall Street, that security analysis had become such an exact science that one software-armed portfolio manager was as good as another.

"Everybody's got a master's degree now and there are computers and instantaneous electronics and history that's been well massaged," Neff said, putting aside a copy of Value Line, an advisory service he peruses regularly for corporate snapshots. "But the market still isn't very efficient, very intelligent or very bright."

Neff's investing approach relies on uncovering hidden value in downtrodden stocks and on a willingness to back decisions with exceptionally large bets. No timid diversification for Windsor, which in the halcyon 1980s attracted so much money that it has been closed to new investors since 1989.

His fans, though, have alternatives. Neff also manages Gemini II, a closed-end investment company trading on the New York Stock Exchange with a portfolio similar to Windsor's, albeit with more convertible bonds. For added attraction, Gemini II sells at about a 12 percent discount, which becomes guaranteed profit when it converts to an open-end fund in January 1997.

A paler alternative is Windsor II, which follows the Neff value-oriented approach but is run by four outside managers. It rose 2.6 percent in the second quarter.

In sizing up a company, Neff looks at the rate of earnings growth, the price-earnings ratio and dividend. This is preceded, of course, by his analysis of economic conditions, which occupies 25 percent of his time.

"You have to be half an economist and be able to develop some convictions to capitalize on your portfolio," Neff said.

While Neff's comeback has been powered by financial stocks - and aided by positions in Chrysler, the oil and gas sector, chemicals and European issues - he contends that the banks have a lot further to go.

Neff, who will be 63 in September, could certainly afford to retire - his holdings of Windsor and Gemini II alone are worth some $90 million. But a life of full-time travel, golf and tennis on his court at home is not yet in sight.

When it comes, there seems little doubt that his successor will be Charles T. Freeman, the assistant portfolio manager who has worked with Neff for 25 years and weathered the bear market of 1973 and '74.

Big-time investing "isn't like finding the ultimate microprocessor and coasting for 30 years," said Neff, who took over when Windsor was a $75 million fledgling. "It's as big and broad as life itself."